Educational Articles

Dow-30 Earnings: Goldman Sachs - Second Quarter 2014

Adam James Platt
| July 15, 2014

Goldman Sachs (GS – Free Goldman Sachs Stock Report), a global leader in investment banking, securities, and investment management, has reported a solid increase in earnings during the second quarter of 2014. Share net came in at $4.10, up significantly from the year-earlier $3.70, as well as sequentially from the first quarter's $4.02. The figure also beat our estimate of $3.70. Furthermore, revenues (excluding interest expenses) were slightly higher than expected, coming in at $10.7 billion, compared with our estimate of $10.5 billion. Investors appeared pleased with the report, and bid GS shares slightly higher, in response.

Investment Banking revenues were up 15% year over year, though they were essentially unchanged from the first quarter. The growth came from a significant increase in equity underwriting revenues, reflecting an annual rise in private placements and initial public offerings.

The Investing & Lending segment, meanwhile, accounted for much of the rise in earnings, due to net gains of $1.25 billion from investments in equities, primarily private equities, as well as $604 million from debt securities and loans.

Institutional Client Services, on the other hand, saw a double-digit revenue decline, both year over year and sequentially. The hardship came in the company's fixed income, currency and commodities client execution business. That market has struggled in recent periods, due to low levels of market volatility and activity.

As a global leader in investment banking, the company faces both financial and regulatory risks. To head off the possibility of another 2008-style crisis and comply with tougher capital requirements, the company has operated with an increasingly conservative balance sheet in recent years. While this has hurt profitability, the risks of another crash are significantly reduced. The most notable regulatory risk is the impact of the Volcker rule, a set of regulations meant to limit banks' ability to trade on their own accounts, a process known as proprietary trading, as well as restricting them from investing in hedge funds. Since a disproportionately high proportion of Goldman Sachs' revenues come from trading activity, it will likely feel a greater impact than other banks.

Despite the strong quarterly earnings result, we are leaving our full-year 2014 earnings-per-share estimate of $15.40 intact for now, as trading activity continues to meander about and the company cannot count on its private-equity gains to be repeated. Furthermore, our revenue forecast of $40.85 will remain steady, as well. Meanwhile, these shares offer above-average total return potential out to 2017-2019, though we advise investors to keep an eye on the impact of new regulations upon the company's trading activities.

About The Company: The Goldman Sachs Group is a global investment banking and securities firm. It operates in four business segments: Investment Banking (18% of 2013 revenues); Institutional Client Services (46%); Investing & Lending (21%); and Investment Management (15%). Last year, 42% of the company’s revenues came from outside of the Americas.

At the time of this article’s writing, the author did not have positions in any of the companies mentioned.